Why Banks Sell Loans They Make
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If you carefully selected your lender for a mortgage, a student loan or some other type of debt, you might be surprised or even upset to receive a letter telling you that the obligation is being sold to another financial institution.
Although there’s nothing inherently bad about loans being sold — the terms of the loan will not change — you could run into problems if you fail to receive a notice or paperwork gets lost. That could cause you to miss payments, costing you late charges and even hurting your credit. Here’s a look at why loans are sold and how you can protect yourself.
Why loans are sold
Many consumers don’t realize there’s a thriving market for loans, referred to as the secondary market. When you borrow from a bank or credit union, you may not notice that the fine print on the lending agreement says the loan may be sold.
“Most lenders sell loans due to liquidity reasons, meaning they don’t want the loans in their balance sheet,” says Cristina Zorrilla, assistant vice president of mortgage pricing and investor relations with Navy Federal Credit Union. “They sell loans so they can lend to more borrowers.”
Some lenders sell loans to other financial institutions but keep the servicing rights.
This means the customer still deals with the same lender and sends the payments to the same place. It hardly affects consumers, since the point of contact doesn’t change. However, many lenders don’t have the capacity to continue servicing all the loans they make, so they sell both the debt and the servicing rights. When that happens, customers have to send their payments to a new organization — and will deal with that new party if problems arise. Only a few, including Navy Federal Credit Union, never sell servicing rights.
What happens next
When a loan changes hands, your debt goes with it, but the terms of the loan and your interest rate stay the same. When a loan is sold, the lender must send you a transfer notice within 30 days. It should contain information about the new loan holder, including contact details. If the notice says the loan’s servicing was also transferred, it’ll instruct you where to begin sending payments and when.
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How to protect yourself
When your loan is sold, errors can occur. An October 2013 report from the U.S. Consumer Financial Protection Bureau describes numerous complaints from borrowers who encountered problems when student loans were sold.
“Borrowers told us they’ve experienced lost paperwork, processing errors that resulted in late fees, interruptions of routine communications like billing statements, and consumers also complain that certain payment processing policies varied depending on who the servicer was,” says Rohit Chopra, the agency’s student loan ombudsman.
Always open mail from your lenders; don’t assume it’s junk, as it could be a notice of a loan being sold. Being proactive also makes it more likely you’ll stay in the loop. Chopra says one of the best ways consumers can protect themselves is to sign up for online account access and make sure their mailing address is always accurate.
“Too often, if contact information isn’t up to date, borrowers will learn about the loan servicing transfer after it’s too late and they’ve been slapped with a lot of fees,” Chopra says. Late payments hurt your credit score, too.
When you receive a notice, look closely to see whether the loan servicer is changing. Chopra says many borrowers, particularly for student loans, set up automatic payments from their checking accounts. If you’ve done this, contact the new servicer to see what you may need to change, and don’t forget to find out when to stop payments to the original lender. Chopra also recommends signing up for online account access with the new servicer to ensure its information about you is accurate.
Zorrilla says being on top of communication with your lender is key. If you recently got a home mortgage and found out the loan was sold, it’s wise to check with the lender to make sure it received the monthly payments so your credit won’t be affected.
Additionally, if you were in the middle of refinancing a mortgage and there was a payment made in the process, Zorrilla encourages consumers to call and verify that the payment went to the right place. You may need to check with both your old and new lender to find that out and to determine whether you need to redo any paperwork.
Once you receive your first statement from the new lender, it’s also wise to double-check to see that everything is correct.
You shouldn’t panic if your loan is being sold, but these precautions can ensure a smooth transition and prevent any credit-damaging misdirected payments.
Emily Starbuck Crone is a staff writer covering personal finance for NerdWallet. Follow her on Twitter @emstarbuck and on Google+.
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